Question

Subway, the fast food restaurant franchise, announced in early 2018 it planned to bring back the “$5 Footlong” promotion. Hundreds of Subway franchise owners protested the promotion saying that they cannot afford to sell the footlong sub sandwiches for $5. You'll want to review the Subway webpage featured in the Chapter 8 module.

Assume that the costs related to a Subway footlong and a Subway franchise include the following

Cost Item	Details	Cost per sandwich
Meats, cheeses, toppings	Per footlong	$2.25
Sub roll bread	Per footlong	$.29
Labor cost per footlong	$15.00/hour wage rate and each worker can make 10 sandwiches per hour	$1.50
Credit card transaction fee	1.0% + $.10 per transaction	$0.15
Electricity	$360 per month dividend by 4,000 orders per month	$0.09
Rent	Rent $1,200 per month divided by 4,000 orders per month	$0.30
Franchise fee amortization	Franchise and startup fees $36,000 divided by 180 months (15 years) divided by 4,000 orders per month	$0.05
Royalty fee	8.0% of sales	$0.40
Advertising fee	4.5% of sales	$0.23
Equipment leasing cost	$600 per month divided by 4,000 orders	$0.15
Cost per footlong sandwich		$5.41

NOTE: Assume all subs are paid for with a credit card

Discussion Questions:

Question #1:  Bob owns a subway franchise and he is furious at the thought of offering $5.00 footlongs. His comment was “they cost us $5.41 each so we will be upside down on each sub sold. I’ll lose my shirt!”. Do you agree or disagree with Bob that this idea should be immediately rejected without any further analysis? If you don’t agree with Bob, why do you think further analysis is required?  

Question #2: What are the relevant and irrelevant costs in this pricing decision? (hint: there are 6 relevant costs)

Question #3: Can you think of any other reasons/factors besides the costs listed above that might be relevant to the pricing decision to offer the $5.00 footlongs? Use your imagination

Answer 1

Question #1.

Further analysis is required.

Cost of $5.41 is arrived at by considering fixed as well as variable costs. Further analysis should be done to arrive at marginal cost of $5 Footlong and compare with marginal revenue. Also the volume of additional sales of Footlong should be considered to arrive at marginal profit/Loss

Question #2.

The relevant costs are the marginal costs to be incurred on the Footlong.These costs need to be incurred per Footlong

Relevant Costs:

Cost Item	Details	Cost per sandwich
Meats, cheeses, toppings	Per footlong	$2.25
Sub roll bread	Per footlong	$.29
Labor cost per footlong	$15.00/hour wage rate and each worker can make 10 sandwiches per hour	$1.50

Credit card transaction fee

1.0% + $.10 per transaction

$0.15

Royalty fee	8.0% of sales	$0.40
Advertising fee	4.5% of sales	$0.23

Irrelevant costs are costs that will be incurrured anyway , whether we decide to sell $5 Footlong or not

These costs do not change with introducing $5 footlong

Irrelevant Costs are:

Electricity	$360 per month dividend by 4,000 orders per month	$0.09
Rent	Rent $1,200 per month divided by 4,000 orders per month	$0.30
Franchise fee amortization	Franchise and startup fees $36,000 divided by 180 months (15 years) divided by 4,000 orders per month	$0.05

Equipment leasing cost

$600 per month divided by 4,000 orders

$0.15

Question#3.

Other factor to be considered:

1. Volume of sales

2.Effect on sales of other items . Whether sales of other items will be impacted and to what extent

3.Reputation issues